All I Really Need To Know About Microfinance I Learned in Bangladesh
Rural microloan borrowers gather for a weekly group meeting.
The home and family of a Grameen borrower in rural Bangladesh, crouched beside the Bay of Bengal between India and Burma.
Since 2006, when Dr. Muhammad Yunus and Grameen Bank received the Nobel Peace Prize for their efforts to create economic and social development by providing banking services to the poorest citizens of Bangladesh, I have watched unfold—with great curiosity—the story of microfinance in the world's most densely populated nation. But I have been even more interested to uncover how microfinance in Bangladesh may influence economic development in our own nation. It seems that, especially in a time of limited financing for economic development initiatives, it may be a good idea to look at models outside America to understand how development has taken place and even prospered with few sources of traditional financing.
So I welcomed the opportunity to travel with colleagues from across the U.S. to examine how microfinance has served as a catalyst to alleviate poverty and nurture social entrepreneurship in Bangladesh. I hoped to witness firsthand the country's development achievements and was prepared to bring back a few key takeaways from the experience to assist in my work here at home. What I was not prepared for, however, was the overarching discovery that all I really need to know about microfinance would be learned in Bangladesh.
Know the People You Serve
Grameen Bank is headquartered in Dhaka and was the first modern microfinance institution in the world. In Bengali, "grameen" means "village," and the bank was designed with an intentional focus to continually understand the people the organization serves. This principle is at the heart of the work being done by Grameen. I had the opportunity to meet with Dr. Muhammad Yunus, the bank's founder; he explained that "the people should not come to the bank, but rather the bank should go to the people." With 26,000 employees in 80,000 villages serving over 8.1 million people, Grameen has made it a priority to extend its services throughout the country. It would be easy for such a large organization to lose sight of its mission. Yet when I visited a branch office in a rural village, the manager noted, "We can only help our customers if we understand the reality they face."
It was this understanding of a population in need that influenced Dr. Yunus to begin the Struggling Members Program in 2003 to extend loans to the poorest of the poor, the beggars of society. With a philosophy that credit should be a human right, Grameen Bank offers no-interest, collateral-free loans (averaging $9 per loan) to the poorest citizens of Bangladesh.
Traffic Light Interest Rates
Acceptable interest rates should be a trademark for development. Dr. Yunus said, "The goal is to help poor people, not to become loan sharks." Using the illustration of a traffic light, he described three levels of interest rates:
- Green Zone – Loans include the operational cost plus less than 10 percent interest for oversight. Microfinance institutions should strive to offer these rates.
- Yellow Zone – Loans include the operational cost plus 10 to 15 percent interest for oversight. These are acceptable, but not preferred, rates for microfinance institutions.
- Red Zone – Loans include the operational cost plus more than 15 percent interest for oversight. Any microfinance institution expecting customers to pay interest rates above this percentage should be considered predatory.
Encourage Entrepreneurship and Social Business
The first loans offered by Grameen were microenterprise loans and they continue to be a driver of the organization's services. The bank's average microenterprise loan is $309. I had the opportunity to meet face-to-face with some rural women—they make up the majority of borrowers and their stories are compelling. Some used their loans to start corner markets, some invested in livestock, two purchased sewing machines, one opened a vehicle repair shop, and another started a neighborhood bio-gas plant. Regardless of the scope of their loan, each borrower is encouraged to use their financing to create jobs for their village. Dr. Yunus explained, "We encourage them to dream to be a job giver rather than a job seeker." As a result, villages begin to thrive with opportunity.
In Bangladesh, there is a movement toward social business. Dr. Yunus noted that he has always had a philosophy that businesses can be started to solve problems, and Grameen encourages borrowers to consider this as they begin their ventures. There are four main principles to developing a social business: 1) it must be sustainable; 2) it must be able to cover operational costs; 3) it must make a small profit so that expansion can continue to occur; and 4) an investor can only profit up to the amount of the initial investment. Dr. Yunus said, "Profit-making business can make me rich, while social business can make a difference in the world."
The Importance of Savings and Investing in the Next Generation
As a prerequisite for receiving a loan, Grameen's borrowers are asked to make 16 decisions, encompassing everything from choosing to drink only clean water to looking after the health of family members to making repairs to their own homes.
There is an intentional focus on the next generation. Education is a private privilege in Bangladesh and there is no public school system. However, every Grameen borrower that I encountered who had school-aged children had them enrolled in primary school. And the education loans offered by Grameen currently allow over 50,000 students (children of Grameen borrowers) to attend college in Bangladesh.
Dr. Yunus noted that an important aspect of investing in the future is the existence of a savings account that allows households to increase their economic sustainability. Many Grameen borrowers have more money in their savings account than they owe on their loans. The borrowers I met emphasized that they struggled to make ends meet, let alone save money, before they received their initial loan from Grameen. Many said that the receipt of that loan marked a turning point, allowing economic prosperity to enter their lives.
Expansion to the U.S.
Bangladesh has experienced significant economic development over the last 30 years, substantially decreasing its poverty rate. Every Bengali dignitary I encountered emphasized the success of microfinance as one of two key factors that has led to widespread development (the other is the booming garment industry). Grameen Bank has been a leader in microfinance initiatives in Bangladesh; a portion of the success of the industry can be attributed to the complementary activities of other organizations (e.g., BRAC and ASA) helping to spread the reach of microfinance throughout the nation, developing a robust environment for economic development.
Grameen brought their model to the U.S. in 2008 under the auspices of Grameen America; currently, branches are operating in New York and Nebraska, with additional branches in development in California, Indiana, Massachusetts, North Carolina and Washington, D.C. While it will be exciting to watch the story of Grameen America unfold, there is plenty of room at the table for other microfinance institutions to address our climbing poverty rate by offering individuals the opportunity to start their own businesses. The U.S. certainly has a number of esteemed organizations promoting microfinance, but the field will need to expand significantly if it is to be used as a tool to rebuild our local economies. As that happens, organizations will be wise to keep in mind lessons learned in Bangladesh.
- U.S. Census Bureau. (2010). Income, poverty, and health insurance coverage in the United States: 2010. Washington, D.C.: U.S. Census Bureau.